Reforming the Priority List: The Public Sector

Public sector seems to be the ideal solution for many of the problems caused by capitalism. A complete conversion to public sector enterprises would eliminate the need for business classes. Improvements in equity in education would remove the distinction between the lower and middle class. Thus, it has the potential to bring about nearly complete equality and equity. If only public sector companies worked…

The difference in the efficiencies of public and private enterprises is probably because of the funding. The sole purpose of a private enterprise is to make profit. If the company does not make profit, the CEO gets the boot. Thus, the CEO in his/her self-interest orders his/her staff to work in a manner that will lead to profit. This command flows throughout the system and everyone works in a coordinated manner towards a common objective. Profit.

Contrast this with the functioning of a public sector enterprise. Public sector enterprises are not necessarily created for profit. They are also supposed to ‘serve the people’ and ‘add value’ to their lives. Hence they need to give value to the people. This requires money, which creates a free flow of cash from the government’s coffers to the company. Also the goal is not very well defined as ‘serving the people’ is a somewhat ambiguous term and many-a-times public sector companies do what private companies do not, like reaching out to sparse rural markets or running railway networks. Hence there are no benchmarks to compare with and any amount of money may be demanded from the government to fulfil the given task. There is also great political will in overcharging the government as there is always money to be made from a cash rich organisation (read: corruption). All this creates a total lack of accountability for the head of the organisation, who is not interested in having his/her staff working efficiently. Thus a sense of collective irresponsibility spreads throughout the system. 

This situation can be corrected by making the head more accountable. For that one must define the goals clearly. While this seems to be an easy enough task in today’s world of information and statistics, it is made nearly impossible by the efforts of our competent political leaders. It is in their interest to obscure issues, as corrupt activities are more easily carried out when activities and goals are obscure and unclear. Hence, we must find a way to force politician’s hands. This can be done by legislating a priority list. A list that prioritises various governmental functions could largely hinder nonsensical political interference. For example, a railway minister would have trouble asking for money stating that it is a necessary public convenience given that education and health are more important and railway can be a profit making venture. But this alone is not sufficient as some areas such as health and start-ups genuinely need money. Thus, we need sound statistical analysis of each area to determine which business can make how much profit. 

In short, one way to make public sector more successful is to clearly define targets. This can be done by formally prioritising governmental functions to determine where money needs to be spent and where profits should be made. This should be accompanied by specific targets for the enterprises based on sound statistical analysis that does not leave room for subjectivity or political interference.

Bridging the Capitalist Gap

The main reason behind support for capitalism comes from optimism. We hope that someday, due to the greater productivity of capitalism, there will be sufficient resources for all. Data seems to support this belief. GDP’s are increasing and despite the vastly unfair distribution, poverty seems to be receding. Or is it? While many ‘advanced’ countries have eliminated poverty, some feel that they have merely pushed the problem around geographically and poverty has not reduced. Statistics cannot help us here, as different countries have different poverty standards rendering ‘global poverty’ a meaningless benchmark.

In this post, I argue that even complete elimination of poverty would merely be a temporary respite. Before we demonstrate that, we need to establish that the GDP of a capitalist economy grows exponentially. Let us look at how we can know this for certain.

The first indication comes from data. Just looking at the graph of GDP verses time gives us a feeling that it grows exponentially. Mathematically too, the very fact that we measure it in ‘percentage growth’ shows that it grows exponentially.  But is this pattern unique to capitalism, or is it a phenomenon that happens in every economy? For that, we will have to try to prove that GDP grows exponentially and consider the possible reasons.

In capitalism, a company produces products for profit. Some of this profit goes towards paying for the costs of production, such as employee’s salary, electricity, machine costs etc. The rest is re-invested as capital. This capital is used to increase the productivity by purchase of more machines or by hiring of new labourers.  Thus, the productivity of a nation grows with time, and with it, we assume, the financial abundance of its population. What is the trend of this growth? Let’s first write a simple equation.

(Amount of produce re-invested) = (Amount produced) – (Amount consumed).

Simple? Now, let us write it in a slightly different form:

=>  (Change in capital) = (Amount produced) – (Amount consumed)

=>  ∆C = P.∆t – X.∆t

C = Capital invested

P = Productivity

X = Rate of consumption

=>  ∆C/∆t = P – X               -------- (1)

To simplify this equation we must simplify the right hand side. Let us try to relate productivity and consumption. First, notice that consumption always happens at the individual level as after all we produce for human consumption.  Thus, we can equate the amount consumed to the amount of consumable goods produced (such as food, water, FMCGs, electronics, electricity (partly)…). In any economy, the size of industries producing these goods won’t change very fast. Thus, we can assume that over a short span of time rate of consumption will be proportional to productivity. I.e.

X = kP       ;where k is the constant of proportionality               ----------------(2)

From equations (1) and (2),

∆C/∆t = P(1-k)        ----------------(3)

We also know that productivity of an economy will be proportional to the amount of capital invested in it. Thus,

P = a.C      ;a is constant of proportionality

Combining with (3), we get,

∆C/∆t = aC(1-k)                ------------------(4)

For people who know calculus replace ‘∆’ by ‘d’ and integrate. Others, please take my word for it that we get the following:

=>  C₁ = C₂e^a(1-k)t

Thus, we see that theoretically too GDP grows exponentially and is caused due to reinvestment of capital. Does it mean that people did not reinvest capital before the advent of capitalism? Most probably not, as having capital certainly had its advantages. But there is only so much to invest in land and labour, for example a landlord expanding his estate would not lead to any overall increase in production (assuming the land was previously utilized). The advent of technology, however, has increased the scope for capital, which has made it possible to increase one’s productivity exponentially.

 It might seem then, that since capitalism has such huge gains in terms of productivity, it might be a good thing after all. For a short duration, maybe. But it makes it almost impossible for a system A to catch up with another system B which is ahead of A. Why? To understand that we must consider what exponential growth really means.

We say that a quantity Q is growing exponentially if the rate of growth of Q is proportional to Q. Note, that this is what is happening in equation (4). Now, if economy A has a higher capital investment (and a higher GDP) than country B, then the rate of growth of capital investment will also be higher than that of economy B. Thus, we see that, under normal circumstances, the capital investment (and thus the GDP) of economy B can never catch up with that of economy A.

Not only will poorer countries be unable to catch up, the difference in their GDP’s will also keep increasing. Already, the rich countries (such as USA) are engaged in poking their noses where they do not belong and bullying the poorer nations. This domination will only continue to increase until they are powerful enough to obtain direct political control over other countries, resulting in a second wave of colonization. History speaks of the disaster thereafter. Once colonies are established, the people there will be exploited brutally and no attempt will be made to help them come up. Thus, any reduction in poverty that capitalism may have achieved would be undone by the colonization that will follow it.

Why Capitalism is Unsustainable

GDP of US in Trillions of US$ - data taken from WolframAlpha

In capitalism a part of the produce is reinvested to increase productivity, either by increasing scale or by improving efficiency. For example, if a weaver has some extra money, then he/she would buy a more efficient loom, probably a powered one. A growing company would increase its employee base, expand its markets and open new factories or offices. This would increase the productivity (rate of production), which can be considered to be proportional to the amount of capital invested. As the productivity of a system (company, state world...) increases, the amount of new capital invested will also increase. For example a large MNC would consider investing billions of rupees whereas a start-up would find an investment of Rs. 1 lakh to be a huge expansion. This means that the rate of increase of rate of increase of productivity will also increase.

While it is difficult to prove how the productivity/capital investment will grow without making some assumptions about the amount of produce reinvested, the above graph confirms the hypothesis that productivity grows exponentially. I chose to take data from the US as they have always been almost purely capitalistic (see my post “Free Market Hypocrisy”), which is a crucial factor in studying capitalism!

Now, a quantity that grows exponentially can outgrow anything that is fixed. Thus, soon we will be consuming all the energy that we receive from the sun. At this point the law of conservation of energy and the law of entropy predict disaster unless we find a method to get more energy, like increasing the surface area of the earth or inhabiting another planet. Thus, capitalism seems to have a fundamental flaw in its very definition. Let’s try to see if there can be a solution to this problem.


Increase in Productivity need not result in Increase in Entropy
Most industrial growth leads to an increase in energy usage. For example, we now have more mining sites, bigger power stations, larger factories and items like FMCG’s and electronics are manufactured at a larger scale. In services too, larger loads are transported and more people work in more comfortable offices.

But this need not be the case.  Higher productivity need not mean bigger or more goods produced and greater amount of services carried out. Productivity can also be increased in terms of the value of the produce produced. For example, a graduate earns more than a matriculate because the labour performed by the graduate is more ‘valued’ and took a longer time to obtain. Investing in education would therefore lead to greater productivity without causing greater energy consumption. But if companies were to invest in improving human skill rather than hiring more of them or giving them better tools, the humans would have to agree to be in a bond with the company. For example, if I join a training programme subsidised by a company, the company would expect me to work for them, as otherwise their investment would have been wasted. While such a set-up would enable the company to invest capital without increasing energy consumption, it could lead to a loss of freedom and is a dangerous solution. Companies may also choose to make machines more ‘clever’ or ‘efficient’ rather than bigger. This would also lead to an increase in productivity without leading to an increase in energy consumption, and is thus an agreeable solution.

Energy consumption of the US (10¹⁸J/Yr) – data taken from WolframAlpha

From the graph it is evident that such improvements in efficiency have been happening as the graph of energy consumption is not increasing exponentially like GDP. But it is still increasing and could lead to environmental problems.

Thus, one should try to increase investment in areas which improve the efficiency and value of the production and discourage investments which would result in an increase in the size and/or quantity of production. While in the short term such a measure may be against the interests of the entities which implement them, in the long term this will help decrease energy costs. Such energy cost considerations are probably the reason why the energy consumption (see graph) has not grown exponentially like GDP.

It might thus be beneficial to promote those industries which improve efficiency and value of production. Examples of such industries include: IT, mass transport, research (patents are economically beneficial) and communication. The government could also take loans from the private sector to invest in education. This would ensure that the value of production goes up while reducing capital availability for entropy increasing investments.

Thus, while capitalism in its current form is unsustainable, careful planning and action might prevent disaster. This does not mean that I am in favour of capitalism. This post is just to indicate that one of the problems with capitalism may be solved within its own framework.

Free Market Hypocrisy

"US would like India to move forward on opening retail" - ET, 13th Dec 2011

Free market is supposed to aid economic growth, and some claim that government intervention in industries will cause inefficiencies. Yet, government intervention is required for protecting the interests of the people. As outlined in my previous post, corporates are ‘power without responsibility’. But they claim to benefit the economy by creating employment and increasing the GDP.

The most vocal supporters of free market are those that stand to gain the most from it, like rich countries (especially US) and large companies. Thus it is logical that we consider these claims with suspicion due to the vested interests involved. In fact, there have been instances where these claims have appeared hypocritical.

For example US has stopped many foreign companies from buying a US based company, stating security reasons. For example,
1.    2005 – China National Offshore Oil Company bid for UNOCAL ... denied ongrounds of national security.
2.    2006 – Dubai Ports World acquisition ofmajor US ports ... denied on grounds of national security.
It did this while pressurising other, weaker countries to open up their own markets.

A similar situation occurred when the Indian government tried to auction some free spectrum in phases during a period of intense competition between companies. During this period, the auction prices would have shot up. Therefore the companies lobbied the government not to ‘artificially’ limit the supply of spectrum to escalate the prices. This is clearly in contradiction with the ideas of free markets that the companies support, as the government owns the spectrum and has every right to do whatever it wants to with it. It has every right to sell it at a high price. I mean, if the prices are too high, then the companies can refrain from buying spectrum, no one is forcing them to buy, are they? That companies are willing to buy spectrum is indicative of the fact that companies see value in it.

From the above examples, it is clear that the propaganda for free markets is led by parties which benefit from other markets opening up to them. Yet, they refuse to follow their own ideals when it doesn’t suit them. This is only possible due to their immense economic power.

This is another indicator why true democracy is not possible with such powerful entities in our midst, strengthening my argument in the previous post.